The Emperor’s New Sustainable Fabric Clothes: How to use ESG information in Vendor Management
By Gus Wilson – EMEA Director
The other day we were preparing for a customer business review. The scope would be the usual business overview of the moving parts between us: who’s doing what, what’s urgent, what’s good, what’s bad (a blank slide, of course!) and maybe some fundamental changes and strategic initiatives. Ahead of the session, our main point of contact said, “If you plan on doing something on ESG, you might get thrown lunch.
To say we were surprised would be an understatement.
In recent years, environmental, social and governance (ESG) information has been of paramount importance and a key demand for many companies. Oversight of ESG by stakeholders and regulators increased. Why didn’t the customer want to see the ESG piece?
The client said “The Boss” was a little frustrated and, to be honest, bored with the ESG content that EVERYONE. SINGLE. FIRM presented.
So we had the customer meeting. It was all pretty standard – handshakes, glowing references for eternity, life-size statues built for us in the foyer.
And then there was the meeting after meeting at the local bar. This meeting is what an old client of mine called “The Real Service Review” where the deeper relationship truths are shared and the longer this session lasts, the deeper the truths.
The boss said that if he was honest with ESG, he thinks it’s all still theater and all a little bit of the Emperor’s new clothes. While he found the ambitions for ESG to be good and noble, in terms of actionable outcomes he saw only acting. If the regulations and interest groups forced him to do so, he would absolutely follow the requirements, but otherwise it was not helpful for his work.
It was at this stage that I realized that we had made the common mistake of assuming that the practical use cases for ESG information were clear. Once we understood this, we were able to rectify this and provide more guidance and support.
For example, certain data within the ESG scores can be used in key performance indicators (KPIs) for supplier contracts. One of our clients explicitly measures ESG values in relation to training and development. This is an S&P Global Sustainable 1 score that reflects the level of capability and investment in T&D. Good performers are much more likely to be good long-term partners here. Vendors who achieve defined KPIs receive incentives in commercials, as well as opportunities for joint webinars and case studies. Of course, if the score is bad, other, more negative, commercial implications apply.
Another client uses the Employment Quality Score as part of their supplier sourcing process to ensure there is a good cultural match prior to selection.
Another has performance reports that pull product stewardship assessments. This is an S&P Global Sustainable 1 score that explicitly indicates the level of environmental “responsibility” demonstrated by the vendor’s product. All of this can have a measurable impact on day-to-day supplier management activities.
The lessons here were threefold: ESG information can be used constructively and well in supplier management and sourcing. Second, finding the key values that matter to your business and then aligning yourself with the right ESG metrics is crucial. S&P Global has experts who can help here. And third, The Real Service Review is still fundamental to all good partnerships, whatever my doctor may say.
To learn more about S&P Global Market Intelligence’s market-leading KY3P® – Know Your Third Part and ESG capabilities.
IHS Markit provides industry-leading data, software and technology platforms and managed services to solve some of the toughest challenges in the financial markets. We help our clients better understand complicated markets, reduce risk, work more efficiently and comply with financial regulations.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, a separately managed division of S&P Global.